My *general* understanding (usual CYA about not being a lawyer or a CPA here) is that you can now only exclude a percentage of the capital gains according to the percentage of the time you used the house as a primary residence.
The general idea is this: If you owned a home for five years but only lived in it for two of those five, you'd only be able to exclude 2/5 of the gain since you used it as a primary residence only 40% of the time you owned it.
As this is tax law, there are always convolutions and exceptions and such, but this is the *general* idea behind the change. The presumed goal was to prevent someone from owning rental property for 18 years and then move into it for two years to exclude all the gain (of course, depreciation would still have to be recaptured).
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)